How important is outside innovation? Just look at Apple Inc.'s wildly successful iPhone. Thousands of external software developers have written applications for the iPhone, and these applications have greatly enhanced the product’s value, transforming it into a tremendous success.
Of course the concept of “open innovation” -- relying on outsiders both as sources of ideas and the means to commercialize them -- isn’t new, but companies have struggled with how to open up their product development to the external world. Many executives have little idea how to motivate and manage outside innovation. Should they organize external innovators into collaborative communities or into competitive markets?
Most people know collaborative communities through the concept of open-source software efforts. The social norms governing these endeavors encourage open access to information, transparency, joint development and sharing of intellectual property. Community members are often willing to work for free.
Competitive markets are much different. External innovators in markets develop competing varieties of complementary goods, components or services and then customers choose from among the different offerings. An example comes from the video game industry. Companies like Nintendo Co., for example, develop hardware consoles -- in this case Wii -- and then encourage third-party businesses to write game software for the platform. In markets, external innovators focus on their own economic interests, which results in fierce competition and little cooperation among them.
Because the dynamics of communities and markets are so different, companies need to consider which approach makes the best sense for them. When a company understands the technology and consumer preferences of a product, it can then conduct internal development or contract for the work in traditional ways. But when a company hasn’t established the technology, design and innovation approach, or when customers need highly varied or not fully understood things, then opening up the innovation to the external world has considerable advantages.
So what is the best way to tap into external resources? The answer depends on how a company wants to manage the diverse knowledge that could be applied to the innovation itself.
If the innovation involves cumulative knowledge -- building on past advances -- then collaborative communities have inherent advantages. These communities are oriented toward solutions that depend on integrating skills and technologies. In fact, they have knowledge sharing built into their design. They tend to share and cooperate, and to support productive collaboration.
Consider the Semiconductor Research Corp., a nonprofit consortium established to accumulate knowledge in silicon technology and semiconductor manufacturing. With members from the industries, government and academia, SRC sets research priorities and coordinates the collaborate work that stems from its goals. Everyone in the consortium has access to the same knowledge. SRC drives research coordination and knowledge dissemination for the U.S. chip industry, and the organization has been credited with discovering many of the building blocks of semiconductor research that have kept the U.S. industry competitive.
If, however, the innovation is best created through broad experimentation across various technical approaches or customer groups, then competitive markets have natural advantages. In mature collaborative communities, members sometimes make assumptions about what work has and hasn’t been done. Think of Wikipedia, for instance. But that’s not generally the case in competitive markets, which often encourage experimentation and foster diversity. And because markets encourage competition -- pitting participants against one another -- innovators will take actions to maintain their proprietary interests as they engage in their work. If their work succeeds, they’ll benefit.
So participants have natural incentives to differentiate their work, to search for novel solutions and to protect rather than share their knowledge -- all of which helps maintain heterogeneity. This isn’t to say that collaborative communities lack creativity, but that the structure of competitive markets encourages different approaches and points of view.
Take, for example, innocentive.com, a Web site through which companies, or “seekers,” post scientific or technical problems for “solvers” -- about 150,000 scientists and other professionals from a range of disciplines and countries. Seekers stipulate a time frame for solving their problems and offer a cash prize for the winning solution. Solvers interested in the problem do their work isolated from other solvers and from the seeker.
By the end of 2008, 80 companies had posted more than 700 problems in biology, chemistry, physics, math, engineering, computer science and business. Solvers found answers for about one-third of those problems. It’s important to note that seekers typically come to InnoCentive because they can’t solve the problems on their own. Also, InnoCentive works carefully with seekers to define their problems such that a diverse set of solvers can work on them. Finally, many winning solutions come from solvers in fields not necessarily connected to the problems. For instance, a winning solution about separating oil and water once they’d frozen together into a viscous mass came from a scientist in nanotechnology.
Ultimately the nature of the problem and the means of solving it are interrelated. Knowing InnoCentive’s pool of solvers lets the Web site shape the different challenges in ways that take advantage of the available diversity. In comparison, SRC realized that its challenge was beyond the capacity of any one company, university or government agency because the knowledge it sought would need to be aggregated by collaborative efforts.
This article is adapted from “How to Manage Outside Innovation,” by Kevin J. Boudreau and Karim R. Lakhani, which appeared in the Summer 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.